Sale of second home

[scrimminger1]

My wife and I recently sold our first home, which our daughter has lived in rent free for the last five years.  Since my wife and I did not live in the home for 2 of the last 5 years I understand it will not be considered a primary residence and we will owe capital gains tax.  Please correct me if I am wrong.

We are trying to understand our tax liability, but several things have occurred that confuse the situation for us.

My wife and I purchased the home in in 1994 and my mother co-signed the loan so we would qualify for financing.  Unaware my mother's name was put on the deed also, we ran into title issues trying to sell the home.

My mother passed away 05/27/2021, and we eventually sold the home 09/01/2023.  Her Last Will and Testament generally left everything equally, but the executor has flexibility over how things are divided.  In order to sell the home, my brother, his wife, my sister, me and my wife had to all sign quit claim deeds to me and my wife's trust.

I am pretty sure me and my wife are required to pay capital gains tax on our share of profit from when we bought the house in 1994 minus any other additions to our basis (original cost of home, major improvements, etc.)

Question 1: Is our share 1/2 the proceeds or 2/3 of the proceeds?

I am pretty sure we are supposed to set the basis value at the time of my mother’s death, but I also heard that it can be set to the same value of the sale if it was close to the time of her death.  Not sure what close means, but we basically had to work through the probate to sell it.

Question 2: When do we establish the basis value for my inherited share?  At the time of her death or when we inherited/cleared probate?

Question 3: Do we create two entries for the separate events or just do the math in a spreadsheet and put the final numbers in one entry?

[RobertB4444 · Accepted solution]

You, your wife and your mom each owned 1/3 of the house.

On the date of your mother's passing you and your wife inherited your mother's share.  The value that you inherited is the value on the date of your mother's death.  So you figure out what that value is and you take 1/3 of it.  

The other 2/3 of your basis are based on what you paid for the house originally as well as any major improvements that you made to the home over the years.  Figure out that value, take 2/3 of it and add it to the 1/3 that is your new inherited basis.

You can also take any expenses of sale (repairs and whatnot to get the place ready to sell) as well as the costs of the sale itself.

Figure all this out and enter the results into TurboTax.  You don't need to show your work on the tax return.  You do need to keep all the documentation proving your numbers on file, though.  If you're ever asked to prove it be sure that you can.

@scrimminger1